Supreme Court grants injunction on Bank Guarantee encashment in construction dispute

The Supreme Court allowed the appeal, set aside the impugned order, and granted an injunction restraining the respondents from encashing the Bank Guarantee furnished for the Anand Vihar works. The Court held that the appellant had made out a prima facie case for an injunction, emphasizing that the law laid down in Union of India vs. Raman Iron Foundry was applicable. The Court concluded that the respondents could not encash the Bank Guarantee for a disputed claim related to another contract.

---

---

Issues Involved:
1. Whether the respondents were entitled to encash the Bank Guarantee furnished for Anand Vihar works in relation to a different contract.
2. Whether the respondents could invoke Clause 62(1) of the General Conditions of Contract (GCC) for recovery of dues.
3. Whether the appellant was entitled to an injunction to prevent the encashment of the Bank Guarantee.
4. The applicability of the law laid down in Union of India vs. Raman Iron Foundry to the present case.

Issue-wise Detailed Analysis:

1. Entitlement to Encash the Bank Guarantee:
The appellant, a Limited Company, was awarded two separate contracts by the respondents (North Central Railway). The first contract dated 22.08.2005 involved earthwork and construction related to the Agra-Etawah new BG Rail Line, while the second contract dated 14.07.2006 (Anand Vihar works) involved the construction of various buildings and facilities. The appellant furnished a Bank/Performance Guarantee for the Anand Vihar works. When the first contract was terminated due to delays, the respondents sought to encash the Bank Guarantee related to the second contract to recover losses from the first contract. The appellant argued that the Bank Guarantee was specific to the Anand Vihar works, which had been completed satisfactorily, and thus could not be encashed for disputes arising from another contract.

2. Invocation of Clause 62(1) of GCC:
The respondents contended that Clause 62(1) of the GCC empowered them to recover any dues from the appellant, even if such dues were disputed and related to another contract. The District Judge initially restrained the respondents from encashing the Bank Guarantee but later dismissed the appellant’s petition, accepting the respondents' argument that Clause 62(1) allowed recovery of dues from any contract. The High Court upheld this view.

3. Entitlement to Injunction:
The appellant sought an injunction under Section 9 of the Arbitration and Conciliation Act, 1996, to prevent the encashment of the Bank Guarantee. The appellant argued that the Bank Guarantee was a performance guarantee for the Anand Vihar works, which had been completed satisfactorily, and that any dues related to the first contract were still under arbitration and not yet determined. The Supreme Court found merit in the appellant's arguments, noting that the Bank Guarantee was specific to the Anand Vihar works and could not be encashed for disputes arising from another contract.

4. Applicability of Union of India vs. Raman Iron Foundry:
The Supreme Court relied on the precedent set in Union of India vs. Raman Iron Foundry, which held that a claim for damages is not a "sum due" or "sum payable" until adjudicated by a court or arbitrator. The Court found that the facts of the present case were similar to the Raman Iron Foundry case, where it was held that a claim for damages cannot be recovered by appropriating sums due under another contract. The Supreme Court concluded that the respondents' claim for damages from the first contract was not a "sum due" or "sum payable" and thus could not be recovered by encashing the Bank Guarantee related to the second contract.

Conclusion:
The Supreme Court allowed the appeal, set aside the impugned order, and granted an injunction restraining the respondents from encashing the Bank Guarantee furnished for the Anand Vihar works. The Court held that the appellant had made out a prima facie case for an injunction, and the balance of convenience and irreparable loss favored the appellant. The Court emphasized that the law laid down in Union of India vs. Raman Iron Foundry was applicable, and the respondents could not encash the Bank Guarantee for a disputed claim related to another contract.

---